NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

Contract No. DE-AC36-08GO28308

Financing U.S. Renewable 

Energy Projects Through Public 

Capital Vehicles: Qualitative 

and Quantitative Benefits

Michael Mendelsohn and David Feldman

Technical Report

NREL/TP-6A20-58315

April 2013
NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

National Renewable Energy Laboratory

15013 Denver West Parkway

Golden, Colorado 80401

303-275-3000 • www.nrel.gov

Contract No. DE-AC36-08GO28308

Financing U.S. Renewable 

Energy Projects Through Public 

Capital Vehicles: Qualitative 

and Quantitative Benefits 

Michael Mendelsohn and David Feldman

Prepared under Task No. SM13.1030

Technical Report

NREL/TP-6A20-58315

April 2013
NOTICE

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iii

Acknowledgments 

The authors thank the U.S. Department of Energy (DOE) for its sponsorship and direction of this 

work. We also appreciate the critical reviews of the following individuals, which greatly 

improved and informed the work: 

• Doug Arent, National Renewable Energy Laboratory (NREL)

• David Arfin, First Energy Finance, LLC

• Jaime Carlson, DOE

• Richard Kauffman, DOE

• David Kline, NREL 

• Jeffrey Logan, NREL

• Robert Margolis, NREL

• Alok Mathur, DOE

• Jim McCrea, DOE

• Brendan Pierpont, Climate Policy Initiative

• Uday Varadarajan, Climate Policy Initiative

• Morgan Wright, DOE.
iv

List of Acronyms

ABS asset-backed security

DOE U.S. Department of Energy

DSCR debt service coverage ratio

EBITDA earnings before income tax, depreciation, and amortization

GW gigawatt

IRS Internal Revenue Service

ITC investment tax credit

LCOE levelized cost of energy

MLP master limited partnership

NREL National Renewable Energy Laboratory

PCTO public capital take-out

PLR private letter ruling

PPA power purchase agreement

PTC production tax credit

PV photovoltaic

RE renewable energy

REIT real estate investment trust
v

Executive Summary

Financing renewable energy (RE) projects via capital raised through public markets (public 

capital) offers the potential to substantially increase the availability, and lower the cost, of 

investment that is critical to continued industry growth. Public capital represents securities that 

are regularly traded and priced by the market, including stocks, bonds, and various investment 

vehicles that are designed to pool a collection of assets that have payment streams. Although no 

strict definition applies, public capital vehicles generally include:

• Asset-backed securities (ABSs), which comprise payments on assets such as mortgages, 

auto loans, and student debt 

• Investment pools such as master limited partnerships (MLPs) 

• Real estate investment trusts (REITs).

RE projects are typically developed so that the power generated is sold through a long-term 

power purchase agreement (PPA), or the equipment is leased to an entity that hosts the system 

and uses the generated power. Additional revenues may be received through the sale of RE

credits or environmental benefits as part of the PPA or through a separate agreement. Thus, RE 

projects can generally offer long-term, stable cash flows, and accordingly may be well suited for 

investors who are seeking such investment characteristics.

The fundamental function of creating a public capital vehicle, or security, is to pool a set of cash 

flows to devise a low-risk, easily tradable product that enables a broad set of investors to invest.

Through this process of pooling assets and selling off ownership interests—sometimes called

securitization—the public capital vehicle takes on numerous attributes that may be attractive to 

investors. These benefits include: 

• Diversity of investment through pooled assets

• Liquidity (marketability) of the security once procured 

• Transparency of the market price through public trading. 

Public capital vehicles are thus generally perceived as being lower risk than private investments 

and can attract capital at a lower yield or return. Thus, access to public capital can generally 

lower the associated return on investment, and therefore the cost of energy. Public capital may 

also expand the availability, increase the accessibility, and lower the transaction costs associated 

with accessing capital, and thus increase and expedite the deployment of renewable technologies.

Public capital can be injected into a project in various forms (equity and debt) and phases 

(construction versus operation) of an RE project. To quantify the possible benefits of these 

options, the following analysis assessed the levelized cost of energy (LCOE) impact of public 

capital availability against current methods of financing solar and wind assets. The analysis 

applied ABSs to represent public capital incorporated as debt, and MLPs to represent public 

capital incorporated as equity. Likely variations in possible financing costs were modeled to 

determine a range of possible LCOEs. Wind was modeled for 2014 (when the production tax 

credit expires) and solar for 2017 (when the investment tax credits revert to 10%).
vi

According to our analyses, increasing the use of public capital can lower a project’s LCOE 

associated with solar and wind deployment by roughly 8%–16% (and perhaps more), depending 

on the assumptions. Figures ES-1 indicates the range of LCOEs calculated for residential- and 

utility-scale solar facilities under traditional, ABS, and MLP financing structures in 2017 when 

the investment tax credit reverts from 30% to its long-term rate of 10%.

Figure ES-1. Comparison of LCOE for residential- and utility-scale solar projects

Source: NREL

Figure ES-2 provides a similar analysis for wind facilities (utility-scale only; residential wind 

facilities are a minute niche of the market). 

$0.00

$0.04

$0.08

$0.12

$0.16

$0.20

Traditional

Financing

Debt Structures

(e.g., ABS)

Equity

Structures (e.g.,

MLP)

Traditional

Financing

Debt Structures

(e.g., ABS)

Equity

Structures (e.g.,

MLP)

Residential Solar - 2017 Utility-scale Solar - 2017

LCOE Real ($/kWh)

LCOE Range

LCOE Benchmark
vii

Figure ES-2. Comparison of LCOE for wind projects

Source: NREL

The combined impact of more readily available and lower cost financial capital associated with 

public capital vehicles could have a significant impact on the wind and solar industries. Access 

to public capital markets might lower the cost of and expedite deployment, expand market 

opportunities, and induce economies of scale in various facets of component manufacturing and 

project development. 

$0.00

$0.01

$0.02

$0.03

$0.04

$0.05

$0.06

$0.07

Traditional Financing Debt Structures (e.g., ABS) Equity Structures (e.g., MLP)

Wind - 2014

LCOE Real ($/kWh)

LCOE Range

LCOE Benchmark
viii

Table of Contents

1 Introduction to Public Capital Markets............................................................................................... 1

1.1 Capital Requirements of the Renewable Energy Industry ............................................................... 1

1.2 Tax Benefit History.......................................................................................................................... 2

1.3 Financial Vehicles To Access Public Capital .................................................................................. 3

1.4 Securitization Fundamentals............................................................................................................ 5

1.5 Access to Public Markets as Part of Normal Technology Maturation........................................... 11

1.6 Incompatibilities of Tax Equity and Public Capital....................................................................... 13

2 Application of Public Capital to Renewable Energy Projects........................................................ 15

2.1 Public Capital as Part of the Initial Capital Stack.......................................................................... 15

2.2 Public Capital as “Take-Out Financing”........................................................................................ 15

3 Levelized Cost of Energy Impact ...................................................................................................... 18

4 Conclusion .......................................................................................................................................... 21

References................................................................................................................................................. 22

Appendix A: Pre-Tax or After-Tax Returns............................................................................................. 25

Appendix B: Model Assumptions............................................................................................................ 26
ix

List of Figures

Figure ES-1. Comparison of LCOE for residential- and utility-scale solar projects..................... vi

Figure ES-2. Comparison of LCOE for wind projects ................................................................. vii

Figure 1. Estimated capital requirements for historical and projected PV and wind deployment..1

Figure 2. 2011 Global assets under management, in $ trillion (hatched excluded from 

calculations)...............................................................................................................................6

Figure 3. Conceptual overview of asset securitization ....................................................................7

Figure 4. Hypothetical solar ABSs ..................................................................................................8

Figure 5. Credit enhancement structures .......................................................................................10

Figure 6. U.S. solar PV deployment and price, by year.................................................................11

Figure 7. U.S. wind deployment and price, by year ......................................................................12

Figure 8. Auto loan ABS issuances and yield................................................................................13

Figure 9. Potential pipeline for PCTO financing (i.e., cumulative U.S. RE projects that have 

passed recapture period) (GW)................................................................................................17

Figure 10. Comparison of LCOE between traditional financing and public capital financing 

(residential and utility-scale solar)...........................................................................................19

Figure 11. Comparison of LCOE between traditional financing and public capital financing 

(wind).......................................................................................................................................20

List of Tables

Table 1. Cost of Capital, Market Size, and Investors— Tax Equity Versus Public Market (U.S. 

Only) ..........................................................................................................................................4

Table 2. Comparison of Qualities Beneficial for Securitization Between Different Sectors ..........5

Table B-1. Basic Assumptions.......................................................................................................26

Table B-2. Financial Assumptions.................................................................................................27

Table B-3. Debt/Equity % of Asset ...............................................................................................28

Table B-4. Common Assumptions.................................................................................................28
1

1 Introduction to Public Capital Markets

1.1 Capital Requirements of the Renewable Energy Industry

The wind and photovoltaic (PV) industries required an estimated $35 billion to finance 

2012 deployments, including an estimated $23 billion1 to install 13.1 GW of wind 

capacity and $12 billion (SEIA and GTM 2013) to install 3.3 GW of solar PV capacity

(see Figure 1).

Figure 1. Estimated capital requirements for historical and 

projected PV and wind deployment

Source: NREL

Meeting a significant expansion of installations consistent with the U.S. Department of 

Energy’s (DOE) Wind Program (DOE 2012a) and Sunshot Initiative (DOE 2012b) goals 

(20 GW of wind, 25–30 GW of PV) will require access to broad new sources of financial 

capital. The projected level of capital required in 2020 represents roughly twice the 

investment required in 2012 for the two technologies combined, including significant 

reductions in installed system costs.

2

Public capital vehicles, such as asset-backed securities (ABSs), master limited 

partnerships (MLPs), and various debt products, represent valuable potential mechanisms

by which to attract such capital and offer the opportunity to do so at low cost. This

improves the affordability of renewable energy (RE) systems. Further, if tax credits 

expire for wind and solar installations—as current legislation dictates—in 2014 and 2017, 

respectively, tax equity investors (who comprise a large source of current RE capital) will 

 

1 Calculated as expected deployment multiplied by industry average price. Assumes wind is installed at 

$1.76/W. 2 2020 financing values assume wind is installed at $1.675/W and solar is installed at $1.00–$1.50/W for 

utility-scale to residential-scale development in 2020.

 -

 10

 20

 30

 40

 50

 60

 70

2006 2007 2008 2009 2010 2011 2012 2020P

Investment ($ Billions)

PV

Wind
2

lose a significant portion of their primary investment benefit, which will magnify the 

need for new sources of capital.

1.2 Tax Benefit History

The U.S. government currently supports RE deployment through a series of tax policies.

These policies can generally be categorized into:

• Tax credits, either through production tax credits (PTCs), which are historically 

available to wind, geothermal, and biomass technologies, and investment tax 

credits (ITCs), which are historically available to solar, fuel cell, and small wind 

technologies.

• Accelerated depreciation benefits, provided through the 5-year Modified 

Accelerated Cost Recovery System, relative to a straight-line depreciation method 

over a longer period.3

When combined, these are called tax benefits and represent approximately 50%–55%4 of 

a project’s installed cost. Generally, RE project developers do not have sufficient taxable 

income to directly take advantage of the tax benefits (without having to “carry them 

forward,” which reduces their value at the time of investment) (Mendelsohn and Harper 

2012). Accordingly, maximizing the tax benefit requires that the project either include 

third parties—known as tax equity investors—in the financial structure, or be developed 

by large entities that have taxable income—known as tax appetite—from other business 

ventures.

Structuring projects to attract tax equity investors has proven to be a time-consuming and 

expensive process, requiring extensive legal, engineering, and environmental due 

diligence analysis. And though a rating agency will conduct similar due diligence on the 

assets that comprise a security, the uniformity of the securitized assets and the large 

volume of assets pooled in the security will likely lower the per-unit due diligence costs

(Schwabe et al. 2012). Further, tax equity investment is highly specialized because it 

requires investors who, among other things: 

• Have a substantial current and future tax liability

• Have the financial acumen to engage in a complex project structure

• Are willing to hold their ownership interests in the projects for several years 

• Are able to invest in illiquid assets that tie up cash and cannot easily be resold

 

3 5-year Modified Accelerated Cost Recovery System is not a benefit to RE projects alone, as the tax code 

allows for many asset classes to depreciate the cost of the asset over a shorter period than the life of 

the asset. 4 Based on a 7% unlevered “real” discount rate typical of a private investor (10% nominal). Also, values 

referenced are based on the gross benefit of depreciation. The outlay from the government is arguably only 

the net difference between a nonaccelerated straight-line depreciation schedule (representing about 16% of 

initial capital costs) and the accelerated depreciation schedule (representing about 25% of initial 

capital costs).
3

• Are sufficiently sophisticated to account for a shifting tax policy environment in 

their investment decisions (Mendelsohn and Harper 2012).

This list of requirements constrains the supply of tax equity, increases the required yield,

and, in effect, negates some of the value of the tax benefits.5 The complexity of taxequity-based finance has limited the number of tax equity investors to fewer than 20, and 

the amount of tax equity to $3–$6 billion per year for the entire RE industry, over the past 

several years (Mendelsohn and Harper 2012). The limited supply of tax equity essentially 

caps the number of RE projects that are deployed. 

1.3 Financial Vehicles To Access Public Capital 

Many parties in the RE industry are seeking financial innovations that can greatly expand 

the availability and lower the cost of capital (Morris 2012; Schwabe et al. 2012). Chester 

et al. (2011) and other researchers have found that the RE industry6 would benefit 

significantly from the availability of “public market capital,” or investments that are 

made through financial vehicles that are procured, sold, and priced on open markets, 

such as:

• ABSs. ABSs pool assets and resell the cash flows into various risk-defined 

tranches. Examples include mortgage-backed securities as well as securities from 

pools of auto loans, credit card debt, student loans, and a myriad of other cash 

flows (see Figure 2).

• Debt products. Examples include government-issued bonds, covered bonds

(Covered Bond Investor 2013),

7 collateralized debt obligations, and similar 

structures.

• MLPs. MLPs are tax advantaged because they are pass-through entities; thus,

their income is not taxed at the corporate level. These structures are specifically 

available to energy and mineral extraction and transportation concerns, but are 

currently not open to solar and wind technologies. 

• Real estate investment trusts (REITs). Pools of income producing “real 

property” such as shopping malls, commercial offices, and apartment buildings.

Similar to MLPs, REITs are generally not taxed at the corporate level as long as 

distribution criteria are met.

The cost of public capital can range (required yield) from a few basis points over U.S. 

Treasuries to the low double-digit range, depending on the risk of:

• The pooled credit; for example, of power purchasers or those who lease 

equipment

• The value and liquidity of any collateral; for example, car titles

 

5 Structuring public capital vehicles is also expensive and time-consuming, but can be applied to a much 

larger pool of projects, thereby distributing the set-up fees and lowering the costs to individual projects. 6 Primarily, this benefit is perceived for the residential, commercial, and industrial markets, and less so for 

utility-scale development wherein each project is highly specialized. 7 Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. 
4

 The performance of the asset (if applicable) 

 The tranche being invested in (see Table 1). 

For example, the top-rated tranche for an auto loan ABS may be rated AAA and carry a 

“spread” over relevant Treasuries of 10–15 basis points. U.S. Treasuries trade in 

durations of 6 months and 1, 3, 5, and 20 years. A securitization vehicle can be indexed 

off the Treasury that is closest in duration to the life of the underlying asset. 

Table 1. Cost of Capital, Market Size, and Investors— 

Tax Equity Versus Public Market (U.S. Only)7F

8

Cost of Capital 

(Indicative)

Market Size— 

Securities Outstanding 

(billions of dollars) 

Tax equitya 

Utility-scale, unlevered 7%–10% N/A (approximately 20 firms, 

mostly financial)b

Levered 12%–18%

Public capital vehicles 

Mortgage-backed securitiesc

 3%–7% $13,200

ABS (non-mortgages)d

 3%–7% $2,150

Debt productse

 3%–7% $31,200

MLPsf

 5%–9% $338

REITsg

 7%–12% $579

a Smith (2013) 

b

 Mendelsohn and Harper (2012) 

c

 Board of Governors of the Federal Reserve System (2012) 

d Gorton and Metrick (2011) 

e Includes bonds only, not bond or loan aggregations such as collateralized debt obligations (Bank for 

International Settlements (2009) 

f

 National Association of Publicly Traded Partnerships (2012) 

g National Association of Real Estate Investment Trusts (2012) 

All combined, these public capital vehicles enable trillions of dollars in investment for a 

wide array of assets. Because of the breadth, maturity, and liquidity of these markets, 

they might be extended to RE asset portfolios relatively quickly and efficiently. 

Certain criteria must be met for these markets to form. Schwabe et al. (2012) found that 

although accessing public markets may be a viable pathway to expand the capital base, a 

lack of data, standardization, and scale currently inhibits that opportunity. Specifically, 

the report showed: 

 

8

 See Appendix A for discussion of pre-tax versus post-tax return. 
5

• The lack of historical, publicly available data addressing RE risks—including 

system production, customer defaults, and operations and maintenance costs—is 

one of the greatest challenges in engaging untapped capital.

• There is no homogeneity among financial transactions for renewables, which 

greatly increases structuring costs and the due diligence requirements for 

each investment.9

A heterogeneous pool of contracts or evaluation practices would require a potential 

investor (e.g., a pension fund) to comprehend and model the wide array of risk factors, a 

seemingly impossible task for a securitization pooling thousands of assets.10 Standardized 

components and contracts11 increase the visibility of the relevant risks and encourage a 

high degree of investor confidence, particularly if rated by a credit rating entity. Projects 

that “conform” to industry standards in the manner they are designed, built, and 

contractually arranged are far more likely to be included in a securitization pool, but 

initiating practice of those standards can require significant industry and investor 

coordination (see Table 2).

12

Table 2. Comparison of Qualities Beneficial for Securitization Between Different Sectors

Housing Automobiles RE Generating Assets

Long lived asset Yes 3–7 years 20–30 years

Asset depreciation No Yes—quickly Yes—slowly

Contracted cash flows Yes 

(with mortgage)

Yes 

(with loan or lease)

Yes 

(with loan, lease or PPA)

1.4 Securitization Fundamentals

Securitization transforms illiquid financial assets (e.g., a solar lease contract) into 

tradable investment products.

13 Potential investors in solar securities may include

institutional investors, private wealth,

14 and sovereign investment funds. These investor 

classes (together referred to as untapped capital sources) held about $105 trillion in 

global assets under management in 2011, but have traditionally not invested in U.S. RE

projects (TheCityUK 2012). Insurance funds and private equity—shown in Figure 2—

 

9 The National Renewable Energy Laboratory and DOE are working to solve these problems by making 

data available to assess the risks in RE investment and organizing the solar industry to standardize 

documents and create homogeneity among financial transactions.

10 A partial exception to this generality are mortgage-backed securities which often aggregate thousands of 

loans from properties in multiple states, different kinds of loans (fixed/floating rate, interest-only, or 

balloon amortization schedules, 15/30 year, first/second lien, mortgages/home equity lines of credit, 

different credit ratings, and indebtedness metrics). 11 Contracts that can be standardized include, but are not limited to, PPA contracts or leases, site control 

documents, and “interconnection agreements,” which dictate how RE projects interact with the 

electricity grid. 12 The National Renewable Energy Laboratory was recently awarded a 3-year contract by DOE to build 

consensus among developers, financiers, public capital investors, utilities, and others on standard contracts 

and other components to enable access to public capital. 13 Securities may be tradable formally—i.e., via an open exchange, or informally through bilateral 

negotiations such as private placement debt. 14 Including private “family foundations” and direct stock ownership by households.
6

currently invest in RE projects, and thus were excluded from the calculation of untapped 

capital sources, although securitized RE assets would likely improve the investment 

opportunity for these entities as well. Of the untapped capital sources, 46% is invested in 

the United States.

Figure 2. 2011 Global assets under management, in $ trillion 

(hatched excluded from calculations)

Source: TheCityUK

To put that value in perspective, if $1 of every $1,000 (0.1%) of the untapped capital 

sources went toward U.S. RE projects, it would result in about $105 billion in 

incremental investments, more than three times total U.S. solar investment to date, 

roughly equal to the total wind investment over the past 10 years, or 15 times the 

maximum annual level of tax equity invested in the wind and solar industries over the last 

several years. 

For additional perspective, by the end of 2012 an estimated $3.4 billion will be invested

in third-party-owned residential PV systems ($1.8 billion in 2012 alone), generating 

approximately $93 million in lease/PPA payments per year (EIA 2012a; Barbose et al. 

2011; GTM/SEIA 2012a, 2012b, 2013; DOE 2011; CSI Database 2013).

15 This value 

represents about 0.003% of all untapped capital sources.

Recent investment activities also suggest significant interest in public capital investment 

in renewables. Warren Buffett’s MidAmerican Energy Holdings (MidAmerican) offered 

a public issuance for the 550-MW Topaz Solar Farm in California. The bond offering for 

 

15 Calculation based on lease/PPA payments equal in value to the average U.S. residential retail rate of 

$0.1186, with a capacity factor of 15.5%. Key assumptions for $3.4 billion third-party investments:

residential system ASP2012 second quarter reported price; residential installations (2006–2009; third-party 

ownership (assumed same percentage of market, by capacity). 

0 10 20 30 40

Private Wealth

ETFs

Hedge funds

Private equity

Sovereign Wealth

Mutual funds

Insurance funds

Pension funds

Global Assets under Management ($ trillions)

Non-Conventional 

Assets

Conventional 

Assets
7

$850 million was oversubscribed by more than $400 million and analysts expect the 

company to issue another round for additional project funds (Doom and Bhayar 2012).

The success of the bond issuance indicated that high-quality solar projects can attract 

low-cost capital from investors. Importantly, however, various market analysts attributed 

the success to the strong balance sheet of MidAmerican and the confidence in Warren 

Buffett and his Berkshire Hathaway investment fund (Lowder 2012).

16

Securitization offers the opportunity to expand low-cost capital to smaller projects, 

projects developed by smaller developers and/or developers with less financial backing. 

Securitization also offers the potential to open the asset class to a wider array of investors 

who seek investment through a liquid, tradable product.

In securitization, assets are standardized and then pooled so that small ownership shares 

can be easily procured, traded, and priced (Jobst 2008) (see Figure 3). Standardization 

requires common contractual documents, value appraisals, or other protocols to ensure 

uniformity among the pooled assets. Beyond industry organization and data gathering, 

the government can play a role in adoption of standardized contracts and other protocols 

by making available credit enhancements, which may also speed and broaden access to 

the securitization and other public capital markets. See text box, Government Credit 

Enhancements To Support Access to Public Capital (see page 10).

Figure 3. Conceptual overview of asset securitization

When properly designed, securitization offers a range of potential benefits to the security 

owner, including:

 

16 The DOE loan guarantee did not provide credit or other support to the Topaz project. 
• A dividend yield 

• Low risk through the diversity of the underlying assets 

• High liquidity with many potential buyers and sellers 

• Consistency through standardized documentation 

• Price transparency by the public market as opposed to confidential bilateral 

negotiation. 

Certain securitization mechanisms have incremental risk specialization capabilities. For 

example, ABSs are generally configured into different “tranches,” or segmented slices of 

the investment, each with a different risk level and credit rating (see Figure 4). The 

highest rated (lowest risk) tranche is paid first. The second-highest rated tranche is paid 

after the first tranche is fully paid, and so on. Investors can invest in a specific tranche 

based on their risk comfort and reward expectation. 

Figure 4. Hypothetical solar ABSs 

As evidenced in the financial crisis of 2008–2009, these instruments can be highly 

volatile, and a poor evaluation of underlying asset values or cash flow certainties can lead 

to misperception of the investment risks. The industry will need to address quality 

assurance considerations for securitized RE assets to ensure long-term success. 

Other financial vehicles that can tap public capital markets, such as MLPs and REITs, are 

not securitization vehicles per se, but accomplish a similar goal to enable ownership 

shares through a liquid, tradable, low cost of capital product that is priced by the market. 

These vehicles are not currently available to invest directly in RE asset portfolios. MLPs 

are open to energy extraction and transportation industries only, and thus, do not extend 

8
 
9

to solar and wind assets (Coons 2012).

17 REITs are not technically available to solar and 

wind assets, as these technologies have not been recognized as real property by the 

Internal Revenue Service (IRS) (Feldman et al. 2012).

18

MLPs and REITs generally have simpler structures than ABSs; the shares of a given 

MLP or REIT generally all have equal value (other than for managers of the portfolio). In 

other words, these structures do not share ABS’s ability to differentiate the riskiness of 

each project in their portfolio through tranches, (see Figure 4). Instead, these structures 

represent equity ownership shares in projects held by the financial vehicle and managed 

by the vehicle’s managers.

 

17 In 2012, Senator Chris Coons of Delaware introduced the Master Limited Partnership Parity Act, which 

would, among other things, extend the definition of assets includible in MLPs to solar and wind 

technologies.

18 As of the publication of this paper, several companies have requested private letter rulings by the IRS to 

broaden the definition of real property to include solar assets.
10

Government Credit Enhancements to Support Access to Public Capital

Federal, state, and local governments can provide credit enhancements to RE investments to 

support the transition from traditional financing structures to the application of public capital 

vehicles. Credit enhancements represent a variety of investment support structures that are 

generally designed to leverage modest public investment to garner significant private (market) 

investment. Three possible strategies are:

• “First loss” reserve. An insurance product offered by the government to a pool of 

projects; it is the first source of capital to take a loss (last to be paid). 

• Coinvestment with private equity. The government invests in RE projects alongside 

private investments. The government has an equal risk to other equity investments. 

• Mezzanine investment. The government invests in RE projects and is repaid before 

equity investors but after lenders.

These strategies can greatly reduce the risk perception among investors, reduce yield 

requirements, and provide valuable experience to nascent forms of securitization (see Figure 5).

Credit enhancements may also represent a valuable incentive by which to spur adoption of 

standardized contracts and installation best practices that may improve the opportunity for 

success in the securitization vehicles.

Government investment in public capital credit enhancements can be a low-risk strategy because 

renewable energy generation projects are backed by long-term contracts. They often also carry 

other guarantees from the developer, equipment manufacturer, and construction entity. See 

Mendelsohn (2011).

Source: Deutsche Bank Climate Change Advisors, 2011 Repayment Position

“First Loss” reduces 

risk exposure of other 

equity investors

In “Co-Investment”, 

public and private equity 

are equally ranked

“Mezzanine” Investment 

reduces amount of 

private equity required

Debt

Private Sector 

Equity

Public First Loss 

Investment

Debt

Public Mezzanine 

Investment

Private Sector Equity 

Investor

Debt

Public CoInvestment

Private 

Sector 

Equity

Figure 5. Credit enhancement structures
11

1.5 Access to Public Markets as Part of Normal Technology 

Maturation 

Technologies and investment vehicles have a pace of maturation. The solar industry, for 

example, has increased dramatically in scale, both nationally and internationally, and 

consistent with early phases of historical technology adoption, the cost of solar 

facilities—particularly for PV modules—has decreased dramatically (see Figure 6).

Figure 6. U.S. solar PV deployment and price, by year

Source: NREL

Wind technology cost and deployment trends have been mixed because of constraints in 

manufacturing, PTC availability, and other factors (Wiser et al. 2012) (see Figure 7).

Wind component shortages (caused by increased demand) and larger turbine size (to take 

better advantage of poorer quality wind sites) increased the overall cost of wind turbines 

between 2006 and 2009 (DOE 2012a). The wind development market has also ebbed and 

flowed with the availability of the PTC. For example, the looming expiration of the PTC 

at the end of 2012 spurred a significant increase in development for that year but also 

caused the development pipeline to contract for 2013. 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

$0

$3

$6

$9

$12

2006 2007 2008 2009 2010 2011 2012

Annual U.S. Installs (GW)

2011 $/WattDC

Annual U.S. PV Capacity Additions

Capacity Weighted Average Installed Cost, Solar
12

Figure 7. U.S. wind deployment and price, by year

Sources: DOE 2012a; AWEA 2013

Of course, wind and solar technologies are still in the early phases of overall market 

penetration, providing about 2% of U.S. electricity (EIA 2012b; Mendelsohn 2012).

19

Beyond adoption of the technology, the financing generally goes through a parallel cycle 

of maturation from high-risk/high-cost/low-liquidity investment to a low-risk/lowcost/high-liquidity investment. During this cycle, initial access to capital can be very 

difficult, and investment is often spurred by government support structures such as direct 

grants and loan guarantees. As technologies mature into early commercialization phases, 

private funding and project finance are frequently deployed to capitalize deployment. 

Project finance—the currently dominant form of capitalizing RE facilities—often 

transitions to more widely available and lower cost public capital markets. 

Customer procurement of products has evolved through similar levels of maturation.

Loan products for upfront capital investments, such as homes, automobiles, and college 

education, have evolved over time. Individual financial arrangements (loans) were 

created to enable market procurement, thus expanding adoption. As the markets 

continued to mature, institutional financial options evolved (e.g., GMAC financing for 

purchasers of General Motors cars), allowing for the pooling and securitization of 

individual financial arrangements. This greatly expanded the availability of financial 

capital. Auto loans, for example, expanded from initial securitization of $0.9 billion in 

1980 to about $127 billion in 2010 (see Figure 8) (Gorton and Metrick 2011, Table 1).

20

 

19 The Annual Energy Outlook includes all renewable sources of electricity except hydro and biomass. The 

value of solar is likely underestimated, as EIA reports PV systems only 1 MW or larger and those that are 

voluntarily reported.

20 Auto loan ABS peaked at $234 billion in 2003.

0

4

8

12

16

$0

$1

$2

$3

$4

2006 2007 2008 2009 2010 2011 2012

Annual U.S. Installs (GW)

2011 $/WattAC

Annual U.S. Wind Capacity Additions

Capacity Weighted Average Installed Cost, Wind
13

Figure 8. Auto loan ABS issuances and yield

Auto loan ABS has historically provided a yield—as required in the markets—of 

approximately 1% over 1-year U.S. Treasury bills, a primary index for the cost of capital.

The primary exception to this yield spread was during the financial crisis of 2008–2009.

Public capital vehicles have several attributes that might be attractive to investors, 

including: 

• Diversity of investment through pooled assets

• Liquidity (marketability) of the security once procured 

• Transparency of the market price through public trading. 

These benefits reduce the risk of individual projects and allow public capital vehicles to 

raise capital at a lower cost (or yield) than private investments. Thus, access to public 

capital can generally lower the associated required return on investment, and therefore 

the cost of energy, for a given RE project.

1.6 Incompatibilities of Tax Equity and Public Capital 

Tax benefits are frequently monetized through tax equity investors: third-party entities 

that have the means and capabilities to use these incentives. Compensation to the tax 

equity investors—for their investments that represent about 50%–60% of the initial 

capital costs—will often comprise some of the tax benefits and an allocation of the cash 

flow generated by the project. Specific details will be negotiated by the sponsor (also 

called the developer), the tax equity investor, and the lender (to the extent there is debt 

held by the project).

To take advantage of the tax benefits, the tax equity investor must not be a closely held C 

corporation or is required by law to either:

• Maintain “active” ownership, which requires a continuing obligation to 

share losses

0

20

40

60

80

100

120

(2.0%)

(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Billions ($)

Auto ABS Issuance

Class A Tranche Spread Over 1-

Year U.S. T-Bill
14

• Apply the benefits against “passive losses,” which generally represent rental or 

other passive income.

21

Investments through pension funds, mutual funds, and similarly managed assets do not 

meet the definition of active ownership, nor do they usually have the passive losses from 

realty income and similar investments to take advantage of the tax benefits.22

Accordingly, it is very difficult to apply public market capital to the tax benefit portion of 

an RE project. However, public market capital can be invested to monetize the cash flows

of a RE project.

In essence, although the tax benefits represent a critical support structure for the success 

of RE deployment, they can also preclude other forms of financial innovation, including 

the development of investment vehicles designed to tap the public capital markets. The 

situation raises several important public policy questions, discussed in Section 2, about 

the effectiveness of alternative public support structures.

 

21 Income through traditional stocks and bonds does not represent “passive” or “active” income but rather 

“portfolio” income.

22 MLPs and REITs are not structured to pass along tax benefits. REITs distribute dividends to shareholders 

not income and thus cannot take advantage of losses. REITs also cannot pass through the ITC. Losses 

generated by MLPs can only be used by the same MLP, and thus constrain their application.
15

2 Application of Public Capital to Renewable 

Energy Projects

Public capital can be applied via two basic methods that could open this type of 

investment to RE deployment:

1. As part of the “initial capital stack,” representing an original source of capital 

funding. There are two ways to use this method and still take advantage of the 

tax benefits.

A. Replace project debt (from commercial lenders) with public capital that 

has a lower capital cost23

B. Replace equity (either sponsor or tax) after the tax benefits expire or 

diminish (post-2013 for wind, and post-2016 for solar).24

2. As “take-out financing,” which would procure the remaining interest of a tax 

equity investor once the tax benefits are fully utilized (and the project is allowed 

to be sold without recapture penalty by the IRS).

2.1 Public Capital as Part of the Initial Capital Stack 

Public capital can be applied as a component of a project’s initial investment when it is 

placed in service. For example, if bank debt were replaced by debt raised through public 

markets, it could expand the availability and lower the cost of such debt (potentially by 

several hundred basis points).

Public capital could be raised either in the form of equity in projects pooled within a 

securitization vehicle (such as MLPs and REITs or a corporate stock equity) or debt 

associated with the lease payments or power purchases (e.g., ABS and debt products).

This opportunity is particularly relevant after current tax credit regulations terminate.

Specifically, the PTC is set to expire for large wind projects that have not yet begun 

construction by December 2013; in 2017 the ITC is reduced from 30% to 10% for solar 

projects and some other RE generation technologies (DSIRE 2013).

25 Without these taxbased incentives, an RE project’s predictable, pre-tax cash flows could look very similar 

to other asset classes that have received investments through public markets, such as auto

loans, mortgages, or consumer credit, because they produce predictable, long-term cash

flows that are available for distribution.

2.2 Public Capital as “Take-Out Financing”

Take out financing represents the opportunity to refinance part of the capital stack, 

particularly tax equity investment, through the securitization vehicle referred to as public 

 

23 Project debt can be fairly inexpensive, but is constrained by a smaller investment pool. Replacing public 

capital for project debt may provide primary benefit of expanding quantity of capital rather than lowering 

its required yield. 24 While public capital can replace tax equity before the tax benefits expire or diminish, as discussed above, 

it may not be able to utilize these benefits.

25 The PTC continues until 2014 for landfill gas, biomass, geothermal, and municipal solid waste systems.
16

capital take-out (PCTO). The availability of a PCTO vehicle may have three unique 

benefits to a project:

• Tax equity investors—typically investment banks—generally seek short-term 

investments by which to reapply their capital. These entities generally do not want 

to hold assets for the life of the project. Accordingly, tax equity investors are 

likely to realize a significant benefit from the availability of a PCTO vehicle, 

which, in turn, may induce tax equity to be available at lower required yields, in 

greater quantities, or both. Similarly, project sponsors may desire some liquidity 

to reinvest in additional RE projects.

• By replacing expensive tax equity at the time of take out with lower cost public 

capital, the project may benefit from the lower overall cost of financing.26 That is, 

once the tax benefits have been fully utilized, the project may benefit from 

substituting public capital for tax equity, thereby lowering the required return 

from that point forward.27

• During the period when tax incentives are still in place, PCTO investments can 

establish a market for public investments in RE projects, thus providing a smooth 

transition once the tax incentives expire.

An analysis was performed to estimate the annual pipeline of potential RE projects that 

will be beyond their tax credit recapture period, from 2013–2017, and thus ideal for takeout financing from public capital.

Figure 9 shows that by 2017 20 GW of wind and solar projects will be past their 

recapture period and could be refinanced through public capital. Wind projects in 2013 

alone could represent $10 billion in freed up capital for reinvestment.28

 

26 Lowering the cost of capital with take-out of financing will not necessarily have a direct effect on the 

negotiated purchase price of electricity on a per project basis. However, PCTO is likely to affect the overall 

availability of capital and in the long run has the potential to lower the initial cost of capital (in turn 

lowering the purchase price of electricity). 

27 Tax equity investors must hold onto their asset through the entire period of tax credit claims or face 

recovery (also known as recapture or clawback) of the benefits by the IRS. 28 Assuming 5 GW of turbines at a cost of $2/W.
17

Figure 9. Potential pipeline for PCTO financing (i.e., cumulative U.S. RE projects that have 

passed recapture period) (GW)29

Data from DOE 2012a, GTM/SEIA 2013, and CSI 2013

 

29 Figure 9 represents all wind projects installed from 1998 that are no longer receiving PTC (10 years after 

asset was placed in service). Assets before 1998 were not included as they may be perceived as too old (or 

with too little time left on their PPA contracts) to repurchase. Solar values represent all utility-scale and 

third-party owned distributed PV projects from 2007 past the 5-year ITC recapture period. There was not 

significant utility-scale or third-party owned PV deployment before 2007.

0

2

4

6

8

10

12

14

16

18

20

22

2013 2014 2015 2016 2017

Cumulative GigawattsAC

Distributed PV

Utility-scale PV

Wind
18

3 Levelized Cost of Energy Impact

An analysis was conducted on the LCOE impact of public capital vehicles as part of this 

initial capital stack against current methods of financing solar and wind assets.30 ABSs

were used to represent public capital inserted as debt and MLPs to represent public 

capital inserted as equity. Likely variations in possible financing costs were modeled to 

determine a range of possible LCOEs. The “high” scenarios assumed the upper end of 

likely debt and equity returns (and no use of the ITC for an MLP structure); the “low” 

scenarios assumed the lower end of likely debt and equity returns (and an ability to use 

the ITC for an MLP structure). (See Appendix B for a description of the range of inputs 

assessed.) Because the greatest cost impact is most likely to occur when the tax credits 

expire, wind was modeled for 2014 and solar for 2017.

The solar analysis was conducted for residential- and utility-scale projects, as these 

segments bracket the market in terms of installed cost and cost of capital, as residential 

projects generally carry higher yield requirements than utility scale. 

All solar scenarios assumed the ITC declines from 30% to 10% in 2017. The ABS 

product was modeled as offering the following benefits over the traditional debt portion 

of the asset financing:

• Lower yield (benchmark values were assumed to decline from 7.5% to 5.5%)

• Longer tenor (from 12 to 20 years)

• Higher debt ratio (slightly more debt on the project, from 55% to 57%, consistent 

with coverage ratio requirements).31

The MLP product was modeled as offering the following benefits on the equity portion of 

the asset financing:

• Lower yield (benchmark values were assumed to decline from 11.7% to 6.0%)

• Higher equity ratios (from 45% to 100%, assumed full MLP ownership of 

the asset).32

The solar analysis in Figure 10 indicated savings of approximately 10% on benchmark 

cases were available to residential and utility-scale projects. Depending on the assumed 

starting and ending points, maximum savings greater than 30% may be available over 

time to the extent the securitization markets can increase comprehension and lowers yield 

requirements over successive issuance of securities. 

 

30 As noted above, although we believe public capital has the potential to be used as take-out financing for 

RE projects, particularly in years when tax incentives are in place, its impact on the price of energy will be 

more indirect, and thus harder to model. 

31 A debt service coverage ratio of 1.45x was assumed for all solar projects 32 MLPs would most likely use some form of debt, however not to improve the cost of capital but to better 

manage capital raises.
19

Figure 10. Comparison of LCOE between traditional financing and public capital financing 

(residential and utility-scale solar)33

Importantly, the systems modeled under "traditional financing" in Figure 10 are assumed 

to successfully access both tax equity and debt, which are difficult and time consuming to 

obtain. Currently, many projects must either forgo debt—as it is simply unavailable—and 

acquire funding from higher yield equity or simply fail due to lack of capital. The greatest 

benefit of successful access to capital markets might not be in reduced LCOE but in the 

ability to expand the scale and increase the speed of solar deployment. These benefits 

were not estimated. 

Figure 11 displays the wind results for the public capital analyses conducted. Wind 

projects benefit more directly from available equity structures, reducing LCOE by 16% 

compared to only 8% for solar projects. This is because solar access to MLPs might 

constrain use of the ITC benefits for solar projects. Both wind and solar enjoy roughly 

10% LCOE declines due to access to ABS or other debt products.

 

33 See Appendix B for a full list of assumptions. 

$0.00

$0.04

$0.08

$0.12

$0.16

$0.20

Traditional

Financing

Debt

Structures

(e.g., ABS)

Equity

Structures

(e.g., MLP)

Traditional

Financing

Debt

Structures

(e.g., ABS)

Equity

Structures

(e.g., MLP)

Residential Solar - 2017 Utility-scale Solar - 2017

LCOE Real ($/kWh)

LCOE Range

LCOE Benchmark
20

Figure 11. Comparison of LCOE between traditional financing and 

public capital financing (wind)34

 

34 See Appendix B for a full list of assumptions. 

$0.00

$0.01

$0.02

$0.03

$0.04

$0.05

$0.06

$0.07

Traditional Financing Debt Structures (e.g., ABS) Equity Structures (e.g., MLP)

Wind - 2014

LCOE Real ($/kWh)

LCOE Range

LCOE Benchmark
21

4 Conclusion

Public capital markets offer the potential to reduce the cost of financing for renewable 

energy projects. Commonly used vehicles such as ABSs, MLPs, and REITs can be used 

to pool projects and access low-cost capital at substantially higher volumes than are 

currently applied to the RE industry. 

The cost of energy from solar and wind projects, as measured by the LCOE, is projected 

to decline from access to public capital, when used to fund RE projects. Just as 

importantly, public capital may increase the availability of project funds significantly; 

something of vital necessity if expensive tax equity investments are to be replaced by 

cheaper forms of capital and to meet the required capital needed for significant expansion 

of installations consistent with DOE’s Sunshot Initiative and Wind Program goals (DOE 

2012a; DOE 2012b).

Federal and state governments can play important roles in developing capital markets for 

RE. Encouraging standardization of documents has the potential to make investors more 

comfortable with RE investment and will to enable assets to be pooled into funds more 

easily. In the early development stages of RE securitization, credit enhancements offered 

by the government can remove some of the riskiness of the debt products to allow them 

to more easily go to market. This can give investors time to become more comfortable 

with these investments and their true underlying risks. Finally, rule changes by the IRS, 

with regards to REITs, and the passage of law, with regards to MLPs, can allow 

companies to be formed that can more easily tap investment vehicles that historically 

have been allowed only by other asset classes. REITs and MLP investors have invested 

billions of dollars in the real estate, energy transmission, and natural gas pipeline 

infrastructure (among others), which has allowed these industries to have tremendous 

growth; changes by the government may do the same for RE. By engaging more 

investors, lowering investment risks, and using more diversification and liquidity, 

securitization could greatly improve access to low-cost capital for wide-scale 

solar deployment. 
22

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23

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25

Appendix A: Pre-Tax or After-Tax Returns

A complicating facet of investment analysis is whether expected returns are evaluated on 

a pre-tax or an after-tax basis. Traditional public market investments, which have no tax 

benefits associated with investing, have pre-tax returns approximately 67% higher than 

their after-tax returns (based on an assumed 35% federal tax rate and an 8% state tax 

rate). The equation for this calculation is:

After tax return = pre-tax return*(1-combined federal and state tax rate)

Therefore, when looking at an investor’s cost of capital it is important to define whether 

it is before or after taxes. Investments in RE are typically evaluated on an after-tax return 

because tax incentives are received through project ownership; evaluating these projects 

on a pre-tax basis does not fully show all potential ownership benefits. However, when 

these tax benefits have been minimized or already used, investments in RE, like 

traditional public market investments, can be judged on a pre-tax basis.

This is further complicated when comparing the tax consequences of investments in 

traditional C corporations to REITs and MLPs. C corporations, in which tax-equity 

investors are most often classified, are taxed at the corporate level and then at the investor 

level, through capital gains and dividend taxes. REITs and MLPs pay no, or a minimal

amount, of corporate tax, but dividends are usually treated as ordinary income. Finally, 

corporate income, ordinary income, and capital gains tax rates can vary depending on an 

individual’s or a corporation’s tax bracket. Because a multitude of factors can impact an 

investor’s return, it is important to understand the characteristics of a typical investor and 

the investor’s expectations for the specific investment.
26

Appendix B: Model Assumptions

Three technologies (residential solar, utility-scale solar, and large wind) were modeled 

using three financial structures (traditional financing, ABS, and MLP). Each financial 

structure has three sets of assumptions: benchmark assumptions, a “high” scenario, and a 

“low” scenario. The arrangement of each financial structure is described briefly here:

Traditional financing. The asset is purchased and placed in service by equity investors. 

These are tax equity and sponsor equity investors with an after-tax return expectation, 

weighted by their percentage ownership in the project. Part of the project is purchased 

through private debt, which is refinanced after 12 years at a higher yield. Debt is sized to 

satisfy the given debt service coverage ratio (DSCR).

ABS. This scenario is identical to the “traditional financing” model, except that instead of 

private debt, debt is raised in the form of an ABS, which is never refinanced and is sized 

to satisfy the given DSCR.

MLP. The asset is purchased and placed in service by equity from the MLP. All funds 

are received through the MLP. The general partner of the MLP receives a partner’s fee.

Table B-1. Basic Assumptions

Residential Solar 

(2017)

Utility-Scale Solar 

(2017)

Large Wind 

(2014)

Capital cost ($/W) 2.85a 1.90a 1.755b

Capacity factor 16.2%c 20.87%d 33.6%e

Annual output degradation, % 

per annum

1.00%f 1.00% 0.30%

Operations and maintenance

costs, $/kW-yr

32.80 f 22.20g 39.55 g

Federal ITC rate 10% 10% 0%

a Represents straight-line cost reduction from SunShot Vision Study 2010 benchmarks of $6/W (residential) 

and $4/W (utility-scale) to 2020 SunShot goals of $1.50/W (residential) and $1/W (utility-scale).

b Represents 2012 installed cost (see DOE 2011). c Capacity factor calculated by PVWatts (version 1) for a PV system in Kansas City, Missouri, with a 

derate of 0.84, azimuth of 180 degrees, and tilt of 25 degrees.

d Capacity factor calculated by PVWatts (version 1) for a PV system in Phoenix, Arizona, with a derate of 

0.87, azimuth of 180 degrees, and tilt equal to the latitude. e Capacity-weighted average capacity factor (see DOE 2011). f DOE 2012. g EIA 2012c.
27

Table B-2. Financial Assumptions

Traditional Financing ABS MLP

Bench High Low Bench High Low Bench High Low

Interest rate—

initial term 7.5% 9.0% 6.0% 5.5% 7.0% 3.0% – – –

Interest rate—

refinancing 

premium

2.0% 2.0% 2.0% – – – – – –

Initial debt term 

(yrs) 12 12 12 20 20 20 – – –

Refinancing 

term (yrs) 8 8 8 – – – – – –

Equity yielda 11.7% 15.0% 10.0% 11.7% 15.0% 10.0% 6.0% 8.0% 6.0%

General 

partner’s fee, % 

of total capital 

investment

– – – – – – 1.0% 1.0% 1.25%c

Portion 

financed 

through ITCb

– – – – – – – – Yesc

a The equity yield refers to different measurements, depending on the structure. In the case of “traditional 

financing” and “ABS” it refers to the project’s after-tax internal rate of return. In the case of the “MLP” it 

refers to earnings before income tax, depreciation and amortization (EBITDA) percentage of the asset’s 

initial investment. Revenues are sculpted to give a given EBITDA for each year, which are assumed to be 

distributed to MLP unit holders.

b In the case of solar, an MLP is still eligible to receive the 10% ITC, however, because it does not affect 

the distributable cash, it has no value in the MLP model. If it could be monetized, it would have the 

potential to lower the LCOE. To estimate this value, the model assumes that 10% of the asset is financed 

directly through the ITC (and thus 90% by the MLP). The general partner’s fee is also increased to account 

for potential additional parties in the transaction.

c Only for solar, not for wind. General partner’s fees in the wind scenarios are kept constant at 1%.
28

Table B-3. Debt/Equity % of Asset

Table B-4. Common Assumptions

Traditional Financing ABS MLP

Residential 

and Utility PV Bench High Low Bench High Low Bench High Low

Debt, % of 

asset 54.8% 56.9% 54.4% 57.3% 58.9% 58.5% 0.0% 0.0% 0.0%

Equity, % of 

asset 45.2% 43.1% 45.6% 42.7% 41.1% 41.5% 100% 100% 100%

Large Wind

Debt, % of 

asset 62.5% 64.7% 62.2% 65.4% 67.1% 66.9% 0.0% 0.0% 0.0%

Equity, % of 

asset 37.5% 35.3% 37.8% 34.6% 32.9% 33.1% 100% 100% 100%

Federal tax rate 35%

State tax rate 8%

Target DSCR 1.40

Residual (multiple of EBITDA) 6.0

Inflation 2.5%